Question

Entity A enters into a construction contract (Contract C) with Entity B to build a factory for $2,860,000 on 1 April 2020. To encourage completion on time, Entity B agreed to pay a performance bonus of $180,000 that would be paid based on the actual completion time. The amount of the performance bonus decreases by 8.00% per week for every week if the completion date beyond the agreed completion date.

The requirements of the contract are similar to the contracts that Entity A has performed before, and the directors of Entity A believe that such experience is predictive for Contract C with Entity B.

They estimated that there was a 36% probability it would be completed with 1 week late. A 20% probability it would be completed with 2 weeks late.  An 18% probability it would be completed with 3 weeks late.  A 4% probability it would be completed 4 weeks late.  Thus, the remaining probability was that Contract C will be completed on time.

REQUIRED:

Measure the amount of variable consideration of Contract C based on the Expected Value Method and the Most Likely Amount Method in accordance with relevant accounting standards.

ANSWER:

Expected Value Method = $Blank 1

Most Likely Amount Method = $Blank 2

Answer 1